Promising signs—including macroeconomic outperformance, falling inflation, and the potential for interest rate cuts—suggest that 2024 may see a resurgence in corporate divestitures. To take advantage of this opportunity, sellers should focus on a few key issues to maximize the value in what will remain a challenging environment. 

For example, we partnered with a global industrial company for over 3 years to carve out two non-core business units to enable focused growth in the core business. Drivers to maximize value included 1) standing up fully independent operations for the carved out businesses 2) identifying levers to offset dis-synergies from previously shared operations, 3) managing stranded costs at RemainCo, and 4) developing a three-year value creation plan to increase attractiveness to potential buyers. 

While the volume of carve-outs was below historical levels last year, many investors are reporting an uptick in pipelines as corporates initiate the process of re-evaluating the strategic role of assets in their portfolios. 

Most dealmakers across the industry expect this to be a defining feature of the M&A landscape in 2024 with corporate sellers beginning to understand that action must be taken to rationalize portfolios and unlock shareholder value. 

Increasing complexity and intensifying market dynamics 

Carve-outs are expected to be a key driver of M&A activity in 2024 and remain a primary source of value creation, particularly for private equity, despite the fact that many of the most obvious deals were completed during the boom of 2021/22.  

Some of the same challenges that dampened M&A activity in 2023 continue to linger. These include, among other factors, challenging public markets, higher interest rates, lower than expected earnings performance, increased scrutiny of buy-side diligence teams, and assets with greater operational and technology entanglements to unpick. All of these contributed to continued misalignment between sell- and buy-side valuation expectations where equity narratives haven’t held up to diligence, including, increasingly, in assets that have been considered at the higher end of the market.  

In addition, an inability to articulate a compelling equity narrative by sellers led to the failure of many high profile carve-outs and exits last year. This lack of a compelling equity narrative is further complicated by the trend toward sellers rolling some form of equity stake into these deals, which requires additional comfort around longer-term value creation opportunities.   

The burning question 

With many processes reigniting this year and sellers thinking about repositioning carved-out assets with clearer value propositions alongside more credible value creation plans, how can sellers maximize the value they stand to gain from planned carve-outs? 

1.    Think like a buyer. 

We have previously explored the changing role and nature of due diligences, indicating how buyer priorities have shifted over time. Given the increased level of scrutiny from buyers, sellers should prioritize sale preparation around a few key areas, including: the complexity around disentangling operations and technology, the credibility of value creation measures on cost, and cash in the first 24 months. Anticipating the questions (and challenges) and proactively addressing those early and upfront ahead of the process will help sellers control the narrative and information flow and minimize the risk of value leakage.  

Moreover, a new owner will need to consider what investments are needed to grow the carved-out asset, including an injection of fresh capital where there may have been oversight or even neglect by prior ownership due to competition from core priorities. So, while carve-outs are generally an after-thought to the core business, they operate within the systems, resources, and processes that are dictated by the core priorities. The resulting opportunity to communicate to both strategic and financial buyers is the ability for carved-out assets to operate more cost efficiently with a streamlined organization after being established as a stand-alone business.  

2.    Create a credible equity value narrative.

Start early. Many assets try to go out with an “unlocked value” strategy. While unlocking the inherent commercial, operational, and technology value levers of a carved-out asset remains the primary value creation lever in corporate carve-outs, building a clear plan and demonstrating early progress in the more complex issues up front helps to reduce the risk of value loss in a sale of complex entangled assets.  

Savvy investors can spot a classic turnaround case from miles away. Positioning the carved-out business plan as a “project” will not attract the broadest set of investors needed to maximize value. Far better to combine carve-out planning with business performance improvement to build a credible track record of robust plans, early-stage results, and a more credible track record to justify the value story. 

Think about talent and capabilities. Often the focus is on operational and technological entanglement, but as important is ensuring that the business has the right capabilities going forward. The entanglement of commercial relationships and capabilities is critical to understanding how the top-line opportunity can be realized at speed. Make sure the right team is involved and that the management team can deliver on this story. 

With sell-side stakeholders increasingly being asked to roll forward minority stakes into carved out assets and divestments, these priorities are becoming increasingly aligned to get deals done. 

3.    Address carve-out complexity proactively to streamline the sign-to-close period and help deliver on the investment thesis at exit. 

Take a tailored approach to execution and move quickly, minimizing the risk to day-to-day business and operating performance whatever the stage of the transaction, as outlined in our recent series of “Maximizing value creation” viewpoints.  

Focus on the key problem areas that tend to cause problems in this crucial phase: 

  • Tech debt entanglements
  • Commercial entanglements
  • Capabilities and relationships
  • Speed and prioritization 

To maximize value in your divestiture, you cannot operate business as usual or with a standard playbook. Sell-side teams must be ruthless in prioritization, critical triage, and demonstrating execution.  

By focusing on these critical elements, sellers can take advantage of an improving market to maximize value in carve-outs.